THE specters that haunt a banker when his world goes mad are terrible. I can tell you because I remember 1907.

A "run" is always appropriate material for the nightmare of a banker. Just fancy yourself as a banker— and discovering outside your plate glass façade an ever-lengthening column of men and women, all having bankbooks and checks clutched in their hands. Fancy those who would be best known to you, the ones with the biggest balances, pushing to the head of the line— there to bargain excitedly with the depositors holding the places nearest the wickets of the paying tellers. Even that won't give you a hint of what a banker's dread is like unless you heighten the effect with a swarm of hoarse-throated newsboys, each with his cry pitched to an hysterical scream; and then give the hideous concert an over-tone of sound from the scuffling feet of a mob.

Although the depositors never gathered as a mob outside our bank, I knew the flavor of terror just from contemplating the possibility. We had the biggest and strongest bank in the country, but obviously we could not hope to be in a position, ever, to pay their cash to all of our depositors if they should demand it simultaneously. Bigness does not save an elephant staked on an ant-hill. Bigness will not save a bank if a run endures long enough. In that year, 1907, the size of the National City Bank was regarded as phenomenal in America, and more than impressive in London, Paris, Berlin and St. Petersburg. We had in our own vaults as our lawful reserves more than $40,000,000—and three-quarters of that sum was in gold.On our books were sums representing millions due us from other banks; we had paper that represented nearly $120,000,000 of loans and discounts; we had many other millions in the form of Government bonds; every day we held possession of pieces of paper representing millions of dollars which were expressed on our books as "exchanges for clearing house." In August, 1907, we were a fabulous organism.

Our total resources were:

$231,455,057.07

But, of course, our liabilities were:

$231,455,057.07

[In 1907, City Bank had cash/gold reserves equaling 17% of its liabilities.]

Borrowed ReservesA financial system so short of cash is bound to have liquidity problems, which can be seen in discount borrowing from Federal Reserve... at least up to 1991.

The discount window is an instrument of monetary policy (usually controlled by central banks) that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions. The term originated with the practice of sending a bank representative to a reserve bank teller window when a bank needed to borrow money.

Note that Wall Street's liquidity problems did not get better post-1991, but instead grew considerably worse. There is no non-conspiracy theory explanation for why the money problems of a cash-starved, insolvent financial system would suddenly completely for vanish completely for two decades.

Gold leasing replaces discount window

Compare the highlighted timeframe below to the graph of borrowed reserves above. It suggests that gold leasing was used as a replacement for the Fed's discount lending to keep insolvent institution alive.

The primary motivation for the for bullion bank gold leasing and producer hedging would, therefore, be a desperation for cash on the part of insolvent Wall Street institutions. Suppressing gold prices and lowering interest rates were probably secondary motivations.

Lack of GDP Growth Volatility also shows manipulation

A financial system with no spare cash is extremely vulnerable to economic shocks (which create liquidity crises). Market manipulation by authorities is necessarily to keep anything extreme from happening, preventing the insolvent financial system from a liquidity-induced collapse. This is the reason behind the activities of the "plunge protection team".

Notice the previous period of gdp growth stability in graphic above? Beginning in 1961, US monetary authorities undertook foreign-exchange-market interventions to forestall a loss of US gold reserves. In the end, these interventi
ons only temporarily delayed more fundamental adjustments and were a failure.

Because so much of its resources were tied up, the ESF intervened mainly in the forward markets. In that way, it would only need foreign exchange if it had to close out a position at a loss. "Reference was made to the extent of operations of the ESF in the forward market, as opposed to spot transactions, and Mr. Coombs [manager of the New York Fed's foreign exchange desk] said the basic reason was that the ESF was short of money" (Board of Governors 1962, p. 169). The dollar often traded at a large discount in the forward market. The Treasury entered into commitments to furnish foreign currencies in the future in order to reduce this discount. In doing so, it hoped to encourage individuals to hold dollar-denominated assets by reassuring them that the dollar would not depreciate in value....The Berlin crisis, however, produced capital flight to Switzerland, and the Swiss franc commanded a premium of 11/2 percent in the forward market. Starting in July, the ESF began to sell Swiss francs forward to Swiss commercial banks, which then became willing to hold the dollars instead of turning them over to the Swiss National Bank. If the Swiss National Bank had been forced to purchase the dollars, it would have been under pressure to use them to buy gold from the Treasury. Toward the end of 1961, the Italian lira became the strongest European currency, and the Italian central bank came under pressure to exchange the dollars it was accumulating for gold. In an attempt to encourage Italian commercial banks to hold dollars rather than turn them over to the central bank, the ESF entered into $200 million in forward contracts.The forward commitments of the ESF in lira and Swiss francs amounted to $346.6 million in early 1962.

Forward commitments, however, carried the risk of loss if the dollar did not appreciate. Given the risk exposure due to the size of its forward commitments, the Treasury felt that the ESF had insufficient cash on hand. To provide it with additional cash, the Treasury wanted the Fed to buy the ESF's foreign currencies such as the deutsche mark [and the Fed ended up doing as asked (Fed doesn't possess free will)].

Let me emphasize this point: in the 1960s, the treasury intervened secretly using OTC derivatives and created a period of artificial gdp growth stability.

Now we have a new period of gdp growth stabilityand strange things are once again occurring in OTC derivative markets. Does it really take a genius to figure this out? Is it hard to understand why Treasury and Federal Reserve officials are the most adamant opponents of regulating OTC derivatives?

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Past Sources of Wall Street Liquidity

The reserve-less US financial system is essentially ponzi scheme. It is hemorrhaging cash and requires a constant inflow of money simply to avoid collapse. This drive to find new sources of liquidity to replace those which are lost is why the US has experienced a series of overlapping finanacial bubbles.

Gold "hedging" and Dot-com bubble (1990-2001)

Mortgage-backed securities (2001-2003)

Cash-funded CDOs and Subprime Mortgage securitization (2003-2005)

Commodity investments (2005-2008)

Collateralization of OTC Derivatives (2007-2008)

The Federal Reserve (2008-2010)With all outside sources of cash exhausted, the Federal Reserve was forced to become Wall Street's latest and final source of liquidity.

dekss - There may be a lot of fresh food such as salad vegetables and berries mid-summer but grain and fruit do not mature until early fall. Live stock must be fed or slaughtered as many areas do not have sufficient pasturage. Shortages have more to do with human behavior than growing seasons. When people feel insecure they will strip the shelves in a few days - faster than the distribution system can replace it - and the price will soar as people hoard.

I think much of what you are seeing in terms of the low reserves and "artificial stability" is due to the statutory or de facto statutory lowering of reserve requirements by the Fed in the early 90s (in response to the 90/91 recession). In other words, direct encouragement by the Fed to ratchet up leverage.

I did a paper on this called "What really happened in 1995?" posted at iTulip (it also mentions gold and Japanese ZIRP, but the core point is about reserve requirements).

One of the core changes was the tolerance of nightly "sweeps" which is where banks aggregate deposit accounts into larger virtual accounts to get by what is left of the meagre reserve requirements. The Fed, apparently, was not bothered by this blatant evasion of core banking stability standards.

Starting from 1992/1993 you can clearly see seasonal variations in the borrowed reserves. However, if gold leasing replaced the discount window, why don't we see any seasonality in the gold lease rate?

The seasonality in the gold lease rate seems to vanish when gold prices started to rise in US$ terms... hmmm....

Moving on to the grains, weakness still prevails and corn continues to be under the impetus of the still fresh-in-our-memory USDA crop report of nearly a month ago. Perhaps most importantly for the corn market, however, is the fact that so much of the corn crop was gathered in far too swiftly and was brought in “out of condition” and may soon go out of condition entirely. This corn must be sold, and it must be sold quickly. Farmers really have little choice. It is sell now, or sell nothing. They’ll take now rather than nothing. How much corn there is to be sold in this instance is open to debate but it is somewhere between 200-500 million bushels.